Colliers Report: Bigger Port, Bigger Industrial Buildings In South Carolina

Research & Forecast Report
Q4-2016 SOUTH CAROLINA | INDUSTRIAL

Key Takeaways

• The market is maturing to a point that is sustainable for the development of larger speculative buildings.
• Growing demand for two-day delivery is causing a shift from West Coast to East Coast shipping.

To download the complete report: Q4 2016 SC Industrial Market Report.

Maturing Market Means Bigger Spec

The South Carolina industrial market is seeing demand for larger warehouse and distribution facilities between 200,000 and 700,000 square feet. Driving the demand is expansion of the e-commerce market, expansion of major manufacturers and low vacancy in the region. To capitalize on this, investors and developers are expanding their portfolios across the state.

To meet the demand of the e-commerce market, retailers need larger distribution centers capable of holding a larger supply of product to fulfill customer orders quickly. Many of the distribution centers need 36- to 40-foot clearance heights and cross-docked loading to allow products to be stored and moved through the facility more efficiently. Access to a deep-water port, an inland port and five major interstates attract these types of companies to the state. South Carolina has access to more than 78% of the nation’s population within a 16-hour truck drive of Columbia, the geographic center of the state, providing a strong opportunity to e-commerce platforms and other distributors to fulfill customer orders and provide last-mile delivery in a much shorter time frame.

The recent announcements and expansions of manufacturers such as Volvo, Daimler, Boeing, Michelin, BMW and five major tire manufacturing companies are creating a wave of demand for industrial buildings in the region from automotive and aerospace suppliers and distributors. This demand, coupled with low vacancy, has increased the need for new and larger developments.

Vacancy rates below 10% are an indication of a strong, tight market. The overall vacancy rate for the South Carolina industrial market was 7.1% at the end of the fourth quarter, down from 7.9% a year ago. Availability of large buildings, 200,000 square feet or larger, provides companies moving to the region an advanced speed to market. Such options are limited in markets like Charleston and Greenville, whereas the Midlands has six quality second-generation buildings, including the former Little Tykes, Bose, Urban Outfitters and Mac Truck buildings. Collectively, these buildings offer 1,845,000 square feet of available product to the market.

The Midlands is also the only South Carolina industrial market with mega sites available: I-95 Mega Site in Clarendon County, I-26 Mega Site in Newberry County and the Central South Carolina Mega Site in Kershaw County. Mega sites have a minimum of 1,000 contiguous acres of developable land with access to utilities, a network of transportation infrastructure and the workforce to support a major employer. These sites are attractive to major employers because they have the infrastructure to support manufacturing or distribution campuses over 1 million square feet with a readily available workforce.

The  markets in Charleston and the Upstate are now maturing to a point sustainable for development of speculative buildings over 200,000 square feet. Proximity to I-85, I-26 and I-95, which lead to major markets like Atlanta, Charlotte and Richmond and offer direct connection to the Port of Charleston and Inland Port Greer, have spurred growth over the last three years.

In Charleston, institutional developers and investors like Clarius Partners, Rockefeller Group, CenterPoint Properties, SunCap, Exeter and Gramercy Property Trust are most active. Clarius is developing a speculative building in Omni Industrial Campus, and SunCap Property Group and WestRock recently completed a speculative building in the North Pointe Business Campus. These investors are also acquiring well-positioned, fully-leased assets with in-place yields. By expanding their portfolios, they are attracting new institutional developers and regional investors, a trend that is expected to continue through 2017.

In the past, the Upstate’s largest buildings were build-to-suits for companies like BMW, Dollar Tree, Michelin and Amazon. Over the last three years, nine speculative buildings over 200,000 square feet were constructed. Six of them were built in 2016 alone, including buildings in the Flatwood, Wingo and White Horse industrial parks. Other buildings are starting to fill the development pipeline, such as the recently announced 332,000-square-foot building in Augusta Grove. These larger buildings are valued by users supplying larger manufacturers or distributing large amounts of products throughout the region. The rapidly growing demand for products just-in-time and the boom of e-commerce will continue to drive the need for larger buildings in the Upstate due to its efficient logistics system.

In today’s e-commerce-centric market, next-day and two-day delivery is an expected convenience for retailers, customers and manufacturers. Consumer goods manufacturers and distributers are under more pressure to meet this demand, making speed to market an even more valuable site selection factor. South Carolina’s unique position and strong logistics network, coupled with the available labor force, will drive new investments from new and existing companies. Access to some of the country’s primary markets and more than 235 million people is a unique advantage for distributers and manufacturers of consumer goods that require next day or two-day delivery of their supplies or products. This access, coupled with the availability of large buildings and mega-sites, provides these companies a speed to market that their customers are demanding.

West Coast to East Coast Shift

The expansion of the Panama Canal has shifted attention to the nation’s East Coast ports. Supporting the shift is the large population on the East Coast and a growing e-commerce market.

The East Coast is home to 55.4% of the nation’s 324 million people. South Carolina is centrally located along the East Coast between New York and Miami and has an estimated population of 4.9 million people. Over the next five years, it is expected to grow to 5.2 million people. Additionally, within 500 miles of the Port of Charleston are major markets like Miami, Atlanta, Nashville, Charlotte, Richmond, Cincinnati and Pittsburgh. This is valuable to companies with e-commerce platforms or manufacturing suppliers that must deliver their products just-in-time to larger manufacturers.

The Panama Canal Expansion opened in June 2016, allowing for larger and heavier post-Panamax ships to travel through the locks. Prior to the expansion, only Panamax ships, which can hold up to 5,000 Twenty-foot Equivalent Units (TEUs), could use the canal. Today, new Panamax and post-Panamax ships, with a capacity to hold 12,000 TEUs and 16,000 TEUs, respectively, can access East coast ports. To prepare for this change, ports along the East coast have started planning deeper port channels and new infrastructure in a race to capture this business.

Charleston is competitive with other East Coast ports because of its central location, and has already begun several major capital improvements. At 48 feet deep, it is one of the nation’s deepest ports. In December 2016, the Water Resources Development Act was enacted, allowing the Charleston Harbor Deepening Project to move forward. Once deepened in 2020, the entrance to the harbor will be 54 feet deep and the harbor will be 52 feet deep. The project will allow larger ships to access the port at any time, making Charleston the only East Coast port able to accept calls from post-Panamax ships at full capacity (16,000 TEUs) at any tide.

Additionally the South Carolina Ports Authority (SCPA) will invest $600 million to install heavier cranes and stronger infrastructure at the Wando Welch Terminal to accommodate the larger capacity vessels. Construction of the Hugh K. Leatherman, Sr. Terminal is underway, which according to the SCPA, will increase the container capacity of the Port of Charleston by 50%. The $700 million terminal has been funded and is the only permitted container terminal under construction on the East or Gulf coast. The Navy Base Intermodal Facility is also underway on 118 acres of the former Charleston Naval Complex. The facility will connect to CSX and Norfolk Southern rail lines and have a drayage road connecting the facility to the Hugh K. Leatherman, Sr. Terminal. Additionally, there will be a port access road and an overpass for Cosgrove Avenue to minimize truck traffic in surrounding neighborhoods and providing direct access to I-26.

Another component of the Port of Charleston is the Inland Port Greer, which opened its gates in October of 2013. Since then, it has experienced three consecutive record years, ending 2016 with a total of 103,644 rail lifts, a 38.0% increase over the 75,111 rail lifts in 2015. The SCPA is also building a second Inland Port off Interstate 95 in Dillon County, 160 miles North of the Port of Charleston near the North Carolina border. The new port will ease traffic as well as accommodate the growing volume at the Port of Charleston by way of a Class 1 CSX rail line. The facility has broken ground and is expected to be completed in early 2018.

The expansion of the e-commerce market across the country has created a demand for consumer products on a faster timeline. Distributors are searching for larger distribution centers along the East Coast to fill consumer orders within two-three days. The Port of Charleston provides companies an efficient logistics system by train, truck or container ship that can deliver products on time.

Market Conditions

The South Carolina industrial market continues to tighten as 10.5 million square feet were absorbed this year, ending 2016 with a vacancy rate of 7.1%. The average asking rental rate for industrial space is $3.51 per square foot per year triple net (PSF/YR NNN).

Charleston

During 2016, more than 2.5 million square feet were absorbed, bringing the market vacancy rate to 4.2%. The Charleston industrial market has the highest average asking rental rate for industrial space in South Carolina, at $4.77 PSF/YR NNN. In only two years, the average asking rental rate has increased by 14.7%.

I-77 Corridor

The I-77 corridor ended the fourth quarter with a vacancy rate of 10.2%, down from 11.7% at the end of last quarter. The average asking rental rate was $3.42 PSF/YR NNN, up from $3.12 PSF/YR NNN at the start of 2016.

Midlands

The annual absorption for 2016 was 1.7 million square feet, bringing the vacancy rate to 7.4% at the end of the fourth quarter. The average asking rental rate for industrial space remained steady at $3.23 PSF/YR NNN during 2016. Over the last two years, the average asking rental rate for industrial space has increased 2.5%.

Upstate

At the close of the fourth quarter, the overall market absorption was 1.3 million square feet, bringing the overall vacancy rate to 6.9%. The average asking rental rate was $3.44 PSF/YR NNN, relatively unchanged from $3.41 PSF/YR NNN at the start of 2016.

 

 

Efficient Logistics

South Carolina’s efficient logistics provide companies quick access to suppliers and customers through its ports, rail lines and interstates. South Carolina ports play a vital role in the continued success of the companies investing in the Midland’s industrial market by expediting delivery of imports and exports, as well as reducing the cost on the transportation of goods.

Total volume for the Port of Charleston at the fiscal year to date shows a 3.4% increase over the 2015 fiscal year to date. The Port of Charleston continues to grow with no signs of slowing down, as it undergoes the construction of a new terminal in North Charleston and a recently funded deepening of its harbor to 52 feet by 2019. The location of the inland port extends the reach of the Port of Charleston and its customers beyond South Carolina’s borders. The Inland Port in Greer, South Carolina adds to the connectivity of the state by providing a direct route via a Norfolk Southern rail line to the Port of Charleston. The Inland Port recorded 9,392 rail lifts in August 2016, a 28.3% increase from a year ago. The combined success of the Inland Port and increased demand within South Carolina markets has led the South Carolina Ports Authority (SCPA) to announce plans for a second inland port facility in Dillion County.

South Carolina is crossed by five interstates, I-95, I-85, I-26, I-20 and I-77, creating heavy traffic that impacts the quality of the road infrastructure. A recent legislative bill signed by the government will commit $4 billion to fix the most heavily trafficked sections of South Carolina’s interstates, including the intersection of I-26 and I-20 in Columbia. The completion of the improvements along these interstates will be key in the expansion of companies reliant on these routes for distribution of goods.

Notable Transactions

Strong activity from institutional investors in the Charleston market at the end of 2016 is expected to continue throughout 2017. Sale activity slowed in the Upstate market in the fourth quarter compared to the third quarter of 2016. Similar to the Charleston market, most sales were to investors rather than users. STAG Industrial expanded their South Carolina portfolio this quarter with two buildings in the Midlands market and one in the Upstate market. Sales in the I-77 corridor were limited to two small buildings purchased by a user.

Strong leasing velocity this quarter, dominated by companies in the logistics, automotive, plastics and aerospace industries, led to the net absorption of nearly 4 million square feet of industrial and flex space across the state. Transaction velocity is expected to continue through the remainder of the year.

 

 

Recent Investments and Expansions

The combination of location, strong workforce, efficient logistics and low cost of doing business encourages companies to stay and attracts new companies to the state. The market is growing quickly, with interest from companies outside of the market intensifying. Not only are external companies looking to enter the market, but existing companies are expanding.

In 2016, there were 59 industrial projects announced, totaling $1.8 billion of investment and the creation of more than 3,862 new jobs in the Upstate. Additionally, $1.6 billion in capital investment and nearly 2,050 new jobs were announced in the Charleston market, and $1.4 billion in capital investments and 2,170 new jobs were announced in the Midlands market. The I-77 Corridor saw two projects totaling $95.8 million in capital investment and 350 new jobs.

Strong Industrial Employment

Total non-farm employment was approximately 2.1 million people in South Carolina in December of 2016, according to the Bureau of Labor Statistics. Industrial employment, those jobs related to the manufacturing and whole sale trade sectors, is strengthening and accounted for 15.4% of total employment in South Carolina, rising to 317,000 jobs. In December 2015, 309,100 people were employed by industrial sectors, 2.6% less than today.

The Upstate Region, consisting of the combined Greenville-Anderson-Mauldin and Spartanburg, SC metropolitan statistical areas (MSA), accounts for 35.9% of total industrial employment in South Carolina. The Charleston – North Charleston MSA makes up 11.3% of South Carolina’s total industrial employment, with 35,700 industrial employees, a 3.2% increase over the last 12 months. With 47,500 industrial employees, the Columbia MSA accounts for 15.0% of total industrial employment in South Carolina. Industrial employment is expected to continue an upward trend.

Market Outlook

A growing port system and road improvements will continue to strengthen the South Carolina industrial market. Continued growth from foreign direct investment can be expected in the coming quarters. Over the last few years, undeveloped industrial land has been acquired by developers and investors, who will likely begin to capitalize on the demand for Class A tilt wall space within the market. Additionally, developers will begin to develop speculative buildings larger than the market has seen historically. The recent capital investment seen from companies in the advanced materials manufacturing, automotive and logistics sectors will continue and promote rapid absorption of new space coming to the market. Market indicators will remain agreeable to investors and landlords as rents and lease terms strengthen and occupancy increases across the market.

For statewide commercial real estate news check out our market reports at: www.colliers.com/southcarolina/insights.

 

To download the complete report: Q4 2016 SC Industrial Market Report.